Retail inflation as measured by the CPI inflation tapered to 3.69% for the month of August. That is a 10-month low and that is the good news. But will it really change the outlook of the RBI with respect to interest rates and is it an assurance that rates will not be hiked from the current levels?
Inflation is not yet in control…
The fall in CPI inflation, combined with a fall in WPI inflation, indicates that the base effect is becoming favorable for India. But that is not great consolation. Firstly, the CPI inflation was driven down by food prices and we are yet to see the impact of 150% assured MSP. Secondly, fuel inflation continues to be sticky with global crude oil prices hovering around the $80 mark. Iran sanctions will only make it worse. Lastly, Kharif data is yet to come out and any shortfall in the overall output will also put pressure on CPI inflation.
It is more about INR and flows
The reason the RBI actually hiked rates in the last two monetary policies was less due to inflation and more due to the weakening rupee. Even after the second hike in August, the rupee has fallen close to the 73/$ mark. That means the RBI will have to keep its options of another couple of rate hikes entirely open. More importantly, it will also be about flows and the US rates trajectory. If the US Fed hikes rates by another 25 bps in September, then the RBI may have to follow suit in October to prevent any risk-off flows out of India. The INR has lost nearly 14% since the beginning of the year so the 50 bps rate hike since June only compensates for the weakening of the rupee. That equation could change if the US Fed hikes rates or gives a hawkish view. The moral of the story is that rupee may matter more than inflation as RBI reviews rates! ©